Public Information Notice No. 11/36

Public Information Notice: IMF Executive Board Discusses Revenue Mobilization in Developing Countries

March 16, 2011

On March 2, 2011, the Executive Board of the International Monetary Fund (IMF) discussed a paper on “Revenue Mobilization in Developing Countries.”

Background

Increasing domestic revenues in order to finance much-needed infrastructure and social spending remains a key challenge in many developing countries. The paper takes stock of experience in this area, in which IMF advice has played a large role, and reviews key obstacles to and opportunities for progress. Against this background, Directors discussed a wide range of issues in revenue policy and administration, addressing both technical issues and the wider political economy of tax reform. The staff analysis noted that some countries have made significant progress, and suggested scope to do more in others. One key lesson of experience, it argued, is the need for sustained political commitment. Looking forward, the staff paper emphasized the importance of efficiency and fairness considerations, and the need to better integrate tax and spending elements in the design and presentation of tax reforms. It argued too that international tax issues affecting developing countries, and the taxation of high wealth individuals, will require increased attention in the coming years.

Executive Board Assessment

Executive Directors welcomed the staff’s analysis of issues in revenue mobilization in developing countries, which draws on the Fund’s expertise in providing advice and technical assistance in this area to its members. They underscored the important role of the Fund in continuing to support developing countries’ efforts to mobilize domestic revenue to meet their substantial spending needs, and expressed strong support for Fund technical assistance in this area. Directors broadly agreed with the main principles and recommendations in the paper, stressing that their application should pay due regard to member countries’ specific circumstances and the appropriate sequencing of reforms.

Directors emphasized that, while the primary objective of tax reform is to increase government revenue, its distributional effects, as well as its impact on efficiency and long-term growth, should be taken into consideration. These aspects should be assessed in the context of the overall tax and spending systems. Directors were of the view that establishing closer links between taxation and spending could help address issues of compliance and governance in taxation. Social protection of the poorest, including through basic public spending, should be an overarching concern.

Directors noted that significant progress in revenue mobilization has been made in many developing countries. Ample scope exists in many countries for increasing domestic revenue further, although important challenges also remain. To make further advances, Directors highlighted the importance of strong political commitment at the highest levels, buttressed by transparent institutions and practices. They considered that the broad strategies set out in the paper for reforming tax and customs policies and administration provide a sound basis for sustained improvement in the quantity and quality of government revenues.

Directors appreciated the wide-ranging discussion of core tax policy issues for developing countries. They noted that the value added tax (VAT) has proved to be a relatively efficient source of revenue. In many countries, there is potential for further revenue from this tax, particularly through a broadening of the base and improvement in compliance. Careful explanation and further analysis of the distributional impact of the VAT and of the links between the VAT revenue and its use for poverty reduction is needed, given the limited capacity in some countries to implement well-targeted social programs.

Directors observed that tax evasion and avoidance by the wealthiest and most influential has been a cause of concern in some countries, particularly those with persistently low tax ratios. Addressing this problem requires concerted efforts, aimed not only at increasing government revenue but also at improving the transparency and fairness of the tax system.

Directors generally viewed tax exemptions and preferential tax treatment as impeding revenue mobilization and creating distortions. Greater efforts are needed to rationalize incentives and phase them out over time, consistent with countries’ development strategies. Directors encouraged staff to continue to assess and highlight the costs and benefits of these tax measures.

Directors welcomed the trend toward reduced reliance on trade tax revenues, but stressed the need to offset the budgetary impact with domestic taxation. They also underscored the increasing importance of international tax issues for developing countries. Greater international cooperation, including on information exchange and in regional groupings, can help protect and strengthen the revenue bases of developing countries. Fund technical assistance in this area will be useful.

Directors emphasized the importance to many developing countries of effective and transparent taxation of natural resources, and looked forward to an opportunity to discuss this topic more fully.